Who Receives Your Tax-Deferred Money If You Die After Retiring 

During your career in public education, many of you enroll in supplemental retirement programs, known generally as tax-sheltered or tax­-deferred programs. These programs are separate from your Teachers' Pension and Annuity Program (TPAF), the retirement plan provided by the State of New Jersey for all its public education personnel.

In many situations, the money saved in the tax-deferred program is not used as a retirement supplement because the combination of the TPAF pension and Social Security is sufficient to meet the retirement needs of school administrators. In those situations, the funds become savings for retirement. However, because the deferred money has been accrued without any taxes being paid on it, taxes will be due when the money is withdrawn from the account after the administrator retires and reaches a specific age set by federal law. Other rules govern the minimum amount, called the Required Minimum Distribution (RMD), that must be withdrawn each year after withdrawals begin and the manner in which any funds that still exist in the account when the retiree dies must be disbursed to heirs.

Until 2019, the rules governing withdrawal and distribution of funds in tax­-deferred accounts rarely changed. However, on December 20, 2019, a bill nicknamed "Secure" was signed into law, changing the amount of contribution amounts, changing the age at which withdrawals must begin, and changing the method and payout period for disbursement of funds remaining when a retiree dies. The new rules require that the RMD must begin April 1 of the year after the year in which such individual reaches age 72. Prior to the change, the trigger age was 70.

The big change, however, occurred in the section of the law where a retiree dies leaving a large sum of money to a family. Under the previous law, all beneficiaries who qualified to receive a portion of the tax-deferred account would receive their payouts for a lifetime, the annual amount based upon their life expectancies. (If someone chose to collect it sooner, he or she could do so...and pay taxes sooner.)

But the new law changes that by separating those beneficiaries who will receive money from the tax-deferred account into two classes: (1) those who can still use the life expectancy tables (surviving spouse of the deceased retiree, a minor child of the deceased retiree, a disabled individual, and an individual who is not more than 10 years younger than the participant} and (2) those who cannot use the life expectancy tables (everyone not eligible for class 1)

Those only eligible for class 2 must withdraw all their money within ten (10) years. Since the passage of the Secure act in 2019, controversy has surrounded the concept of the "ten years." Some have argued that anyone eligible for the ten years withdrawal can delay withdrawing any money until the end of ten years have been reached.. Then the entire amount can be withdrawn. Others have argued that one tenth of the principal must be withdrawn each year so that the total amount will have been withdrawn at the end of ten years.

Because of this disagreement, a new Secure bill is moving through Congress containing a clarification of the language. It is expected to be voted upon before the end of the year.